HK 'could face debt crisis within 15 years'

Experts' projection is a call for serious attention: Financial Secretary

By Li Xueying, The Straits Times, 27 Feb 2014

A HEALTH check on Hong Kong's public finances has yielded the grim diagnosis that the city could suffer a structural deficit within 15 years based on current spending trends.

Buffeted by the twin developments of an ageing population, with growing health-care and welfare needs, and a shrinking workforce, Hong Kong will see its spending increase by 5.3 per cent each year, while revenue collected will slow to 4.5 per cent.

The debt crisis could emerge even earlier, in seven years, if the government continues to widen its social coverage as it did in past years.

This was the projection submitted by a group of economists and other experts which Financial Secretary John Tsang announced during his Budget speech yesterday.

It is a "clear warning and call for serious attention", he said.

In a 90-minute speech focused on competitiveness, Mr Tsang said steps need to be taken to stave off what he called "irreversible fiscal plight" even though public finances remain in good shape in the short term.

"More vigorous" control needs to be exercised over spending priorities. Tax enforcement will be stepped up. Fees will be increased. And a "Future Fund" of HK$220 billion (S$35.9 billion) may be established to be drawn on in times of need.

But Mr Tsang was non-committal on broadening Hong Kong's narrow tax base and increasing tax rates, saying there is "little room" for major tax hikes given the impact on the city's competitiveness and its people.

Any adjustment of Hong Kong's tax regime will be closely watched by Singapore. Both seek to attract companies and individuals with low taxes.

Hong Kong's economy grew 2.9 per cent last year, and could reach 3 to 4 per cent this year, said Mr Tsang. But this remains below its 4.5 per cent average growth of the past decade. Looking ahead, the experts project its real gross domestic product to grow at 2.8 per cent per annum for the next 20 to 30 years.

Observers say the Budget is on the right track in planning for the long term.

"The government could start considering other measures in other countries, for example, GST (goods and services tax)," said Ms Grace Tang, tax and business advisory services partner at Ernst & Young.

Tax cuts in HK Budget but no big handouts
The Straits Times, 27 Feb 2014

HONG KONG unveiled a modest package of measures for its working class in its Budget yesterday, as it tries to ease pressure on its finances while appeasing voters increasingly concerned about the city's growing income gap.

The Budget, presented by Financial Secretary John Tsang, contained some tax cuts for the working class but a bumper "giveaway" package did not materialise this time.

Mr Tsang did budget around HK$20 billion (S$3.3 billion) in one-off relief measures, including tax concessions, rent subsidies for public housing tenants and welfare handouts, but that was less than the previous year's HK$33 billion in one-off assistance. In addition, annual expenditure for elderly services, already increased by more than 40 per cent to HK$5.4 billion over the past five years, will see a boost of more than HK$660 million.

The city's lower- and middle-income families are struggling with rising costs from home prices that have more than doubled since 2008, and the spillover effects of a strengthening yuan.

Mr Tsang said the government would not loosen a raft of property cooling measures that have begun to show signs of moderating the once red-hot market. "These (measures) serve to forestall an increased risk of a property bubble that would hamper our macroeconomic and financial stability," he said.

A targeted 470,000 residential flats would be built in the coming 10 years, and 71,000 private units are expected to come onto the market within four years.

There will also be help for businesses, with stamp duty to be waived for trading of all exchange-traded funds.

To foster the longer-term economic development of Hong Kong, there will be assistance for the Airport Authority Hong Kong to press ahead with the planning for a three-runway system.

Mr Tsang noted that there remains a manpower mismatch and relatively high youth unemployment that need to be addressed.

To ensure the city's manpower resources can meet the needs of economic development, the government has to strengthen life planning, vocational education and training for youth, he said.

Measures to enhance manpower skills include a HK$1 billion endowment fund for workers' skills upgrading and new training schemes in schools to cultivate IT professionals.

The government recorded a provisional surplus of HK$12 billion for the 2013/14 fiscal year, in line with expectations, but far less than HK$64.8 billion last year, prompting Mr Tsang to stress the need to preserve Hong Kong's revenue base, though without raising taxes.

REUTERS, XINHUA

'More needs to be done' to avert HK crisis
Revealing long-term finance figures key first step in tackling challenges: Analysts
By Li Xueying, The Straits Times, 28 Feb 2014

FINANCIAL Secretary John Tsang quoted a line from his favourite song at the end of his budget speech on Wednesday.

"Believe in opportunity, not fate," he trilled, adding that this is the innate mindset of Hong Kongers.

Certainly, the lyrics from rousing ballad Crossroads sung by local rocker Danny Summer could well apply to the government, which seized the initiative to commission some projections on the city's long-term public finances - and made them public to get a conversation going.

But opportunity may well segue into fate if this conversation remains just talk.

A group of economists and other experts tasked to take the pulse of Hong Kong's long-term finances has projected that the city will suffer a structural deficit in 15 years, based on current spending and adjusted only for demographic and prices changes.

Widening coverage for education, social welfare and health care could see a debt crisis emerging in a mere seven years.

The projections "spark off a clear warning and call for serious attention", Mr Tsang said, adding that Hong Kong will step up tax enforcement, increase fees and consider a new reserves fund.

But far more needs to be done to avert a crisis, say analysts here. The city should look at neighbours which also face similar challenges of an ageing population and a shrinking workforce.

"We are looking at Singapore, to see what it is doing," said Mr Marcellus Wong from the eight-member working group of experts which will release its detailed report on Monday.

Social spending in both cities is set to rise. While Singapore announced an $8 billion Pioneer Generation Package last week, the Hong Kong government under Chief Executive Leung Chun Ying came up with a Workfare-style scheme to supplement workers' income, while pledging to ramp up public housing. Another HK$660 million (S$ 107.8 million) this year is going to elderly services.

Since dampening spending is not a real solution, analysts say the key is for the government to boost its coffers. An obvious recourse is to broaden Hong Kong's tax base and to raise taxes. Only about 45 per cent of the working population pay income tax. Unlike Singapore, Hong Kong does not have a goods and services tax (GST).

But any such move here will be controversial. A bid to introduce a GST in 2006 was abandoned after public opposition. With fiscal reserves standing at a massive HK$700 billion, people are unlikely to accept it. Meanwhile, companies will fight tooth and nail against moves to increase corporate rates.

"Politically, it is difficult to introduce any new taxes in Hong Kong," acknowledged Mr Wong, a senior adviser at PricewaterhouseCoopers.

A less painful way is for the government to drive economic growth, which will increase tax receipts. Gross domestic product growth last year stood at 2.9 per cent, and the group has projected, based on certain assumptions, that real GDP will grow at 2.8 per cent a year for the next 20 to 30 years. Singapore's GDP growth last year was 3.7 per cent.

One area in which Hong Kong needs to go great guns is nurturing innovation and its technology industry, said Mr Wong. "This is a new area that Hong Kong has not done well in. We moved a very small step in this budget, such as in giving seed money to universities. But far more needs to be done."

Introduce a Productivity and Innovation Credit scheme that rewards companies for adopting automation as Singapore has done, suggested Ms Grace Tang, a tax and business advisory services partner at Ernst and Young.

Meanwhile, the government has also taken a good first step in considering interest deductions in the taxation of treasury activities, "definitely a good way to encourage more overseas companies to set up their treasury functions here", said Mr Davy Yun, tax partner at Deloitte China.

Hong Kong has its strengths too - not least in labour productivity growth. However, this has slowed since the 2008 financial crisis, noted HSBC's Greater China economist John Zhu.

"Hong Kong is a services-driven economy, which means investment in education and skills, in addition to infrastructure, will be key. Indeed, deficits, if brought on by wise spending on investment in human and physical capital, should actually reduce the risks of structural deficits in future."

On Wednesday, an important first step was taken, with the publication of such projections. Singapore does not make public any such reports as it does not reveal the full size of its reserves.

As Ms Tang noted: "With this kind of analysis, we will have a heads-up on challenges ahead."

Steps for HK to avoid structural deficit
GIC-like sovereign wealth fund among expert panel's suggestions
By Li Xueying, The Straits Times, 4 Mar 2014

FROM extra vetting of expensive public projects to setting up a Future Fund that could invest a third of annual budget surpluses, Hong Kong needs to take "urgent" steps to avoid a structural deficit in as soon as seven years, a group of experts said.

But these experts, who have been tasked with looking at Hong Kong's long-term fiscal health, dismissed the idea of raising taxes on income and profit.

Even if Hong Kong doubled taxes, an "extreme" measure, it will yield just HK$169 billion (S$27.6 billion) annually - or 8 per cent of Hong Kong's gross domestic product (GDP) last year. It will also hurt the city's competitiveness and drive foreign investors away, they noted.

Instead, they recommend a multi-pronged approach which includes indirect taxation, such as sales taxes, capping annual government spending at 20 per cent of GDP, and reviewing big-scale infrastructure projects.

The most headline-grabbing is the establishment of a "Future Fund" for rainy days.

It is "politically hard" to do given fears of sparking inter-generational wars, said group member Mark Saunders, managing director of consultancy Towers Watson.

But by conceivably taking the form of a sovereign wealth fund such as Singapore's GIC, it will earn Hong Kong higher returns in the long run. It can also invest in companies that benefit the city in areas such as technology, he said.

With an endowment of HK$220 billion of pre-1997 land revenues, together with a third of budget surpluses plus returns, the nest egg could grow to HK$510 billion in a decade, the group estimates.

It released its 252-page report yesterday after being tasked by Financial Secretary John Tsang last year to check on Hong Kong's long-term public finances in view of an ageing population and shrinking workforce. It drew on experiences in other countries such as Singapore and Australia.

Mr Tsang made use of its findings last week when he announced the city's budget, warning that Hong Kong should be mindful of its spending.

Given current healthy reserves of HK$745 billion, it sparked some criticisms that the group was over-pessimistic.

Not so, said its chairman, Ms Elizabeth Tse, who is also Permanent Secretary for Financial Services and the Treasury.

"The figures are not plucked out of thin air, and this is not scare-mongering," she said during a press briefing.

The group of economists and other experts found that since 1997, government-spending growth outpaced revenue increase, at 4.7 per cent a year versus 2.5 per cent.

It then used an econometric model to set out certain scenarios.

If Hong Kong's coverage of education, health care and social welfare - which takes up 60 per cent of recurrent government spending - remains constant, it will suffer a structural deficit in 15 years and deplete its reserves after 12 years.

But if Hong Kong does increase its coverage at the rate of 3 per cent a year - as is the trend since 1997 - a structural deficit will emerge in seven years, and it will be in debt to the tune of HK$11 trillion by 2041.

On whether there is room for Hong Kong to propel its economic growth, forecast to be at 2.8 per cent, economics professor Francis Lui said Hong Kong is a mature economy but can try to "make the best use of the China factor".

This will however have its limits given the shrinking workforce and slowing productivity.

Mr Saunders said that importing labour is an avenue but it faces opposition from unions here.

Mr Tsang yesterday said the group will be invited to submit more comprehensive analyses on some of its recommendations.

Related
Report of the Working Group on Long-Term Fiscal Planning
Hong Kong Study Group Suggests Creating $28 Billion Savings Fund